A "Dynamic" Amendment to the Senate Budget

Mar 29, 2013 | Budget Process| Taxes

Among the many amendments that were voted on to the Senate budget resolution, one caught the eye of POLITICO: Sen. Rob Portman's (R-OH) amendment to have the Congressional Budget Office/Joint Committee on Taxation use dynamic scoring. The amendment passed by a 51-48 vote, with a handful of Democrats joining all Republicans in voting for it. Having written a report on this topic last year, we figured we'd take a closer look at what the amendment would mean, assuming that it passed the full Congress.

First, a little background on dynamic scoring. CBO's scores of legislation do not take account into macroeconomic responses, changes to variables like gross domestic product, employment, or inflation. They do, however, take into effect microeconomic responses, explained as follows in our paper:

The types of behavior estimated under conventional scoring include effects related to the timing of economic activity, shifting of income between taxable and nontaxable categories, effects on supply and demand, and interactions with other taxes. For example, an estimate for a future increase in the capital gains tax will account for the fact that taxpayers will accelerate their realization of gains into the year prior to the tax increase to avoid the higher tax rate, and will also assume that future taxpayers will sell their assets less often and hold more assets until death. Estimates of lower income tax rates, as another example, would show an increased tax base as people are enticed to shift more compensation from nontaxable benefits, such as employer provided health care and retirement plans, to taxable wages.

Estimates of spending programs also take microeconomic effects into account, such as expected changes in participation, utilization, or reported income. For example, when CBO estimates the effect of changes to Medicare cost-sharing rules (such as higher copayments), they take into account changes in health care utilization (such as fewer visits to the doctor). Similarly, CBO’s estimates for agriculture legislation include anticipated effects on crop prices and production.

Portman's amendment requires that CBO provide a macrodynamic estimate for any changes in revenue (increases or decreases) larger than $5 billion in any fiscal year. For example, while CBO would already take into account a tax rate increase's effect on how much income a person receives in taxable versus non-taxable form, this estimate would also take into account the rate increase's effect on things like GDP or inflation. CBO's budget score would thus reflect these changes, showing how revenue and spending are altered not only from first-order effects and the microdynamic effects, but also the macrodynamic effects. Note that the amendment only requires that this estimate be provided as supplemental information rather than as a replacement for the traditional CBO/JCT score.

There are a number of arguments both for and against adopting or relying on macrodynamic scoring, which we summarized in last year's report. Arguments for it include providing lawmakers with more information about legislation, reducing bias against pro-growth policies in scoring, and taking advantage of advances in economic modeling and new research about the effects of various policies. Arguments against it include the sensitivity the score would have to what assumptions or model the scoring agency uses, the requirement that scorers make assumption about future policy changes or otherwise render an estimate meaningless, and the impracticality of having to keep updating CBO's baseline economic projections for new legislation.

In general, we believe deficit reduction efforts should be designed to add up without the effects of economic growth. Rather, the growth should be pursued to the greatest extent possible, and the benefits could provide an important fiscal dividend. As we explained in our paper:

Importantly, policymakers should be pursuing pro-growth policies regardless of how they are accounted for. In addition to having benefits in its own right, faster economic growth will lead to higher revenue, lower spending on safety net programs, a greater capacity for individuals and businesses to bear tax and spending changes, and a greater capacity of the economy as a whole to carry debt (i.e. higher GDP will lower the debt-to-GDP ratio) – all of which can help the country address its fiscal challenges. Even if scorers do not account for these effects directly, pro-growth policy changes can yield a bonus in the form of lower than projected deficits and debt. Currently, we are faced with making painful choices that, unfortunately, can no longer be avoided. Higher growth will not make painful choices go away, but it will make them relatively less painful.

There is a strong case for supporting something like the Portman proposal, which provides a secondary economic estimate and can thus offer policymakers additional useful information. At the same time, only applying this analysis to the revenue side of the equation neglects the real negative and positive effects that spending changes can have on the budget as well.

Regardless of what is and isn’t measured, we would encourage Congress and the President to pursue policies which both promote economic growth and put the debt on a clear downward path.